- 1-Payoff All of Your Debts
- 2-Payoff Your Mortgage
- 3-Invest Into Your Retirement Funds
- 4-Create A Serious Emergency Fund
- 5-Assemble A Dividend Stock Portfolio
- 6-Buy Rental Properties
- 7-College for Your Children
- Final Thoughts: How To Invest $100,000
Perhaps you’ve just inherited a large windfall, received an enormous profit-sharing check from work, or downsized when you sold your home. Or maybe you’ve been a really diligent saver and noticed your bank account now has six digits.
No matter how you got there, deciding what to do with $100,000 (or more) is not something to be taken lightly. Here are some of our best tips for how to invest $100,000 and get a maximum return.
1-Payoff All of Your Debts
According to CNBC, the average American now carries approximately $38,000 in personal debt (excluding home mortgages). That could be from any number of sources, including credit cards, student loans, car loans, etc.
If you’ve come into possession of $100,000, then you’re definitely going to want to use that money to pay off your debts. Start by looking at your high-interest debts first like credit cards or personal loans. Getting rid of a credit card balance that carries a 30 percent APR is almost like making an investment that pays you 30 percent because you’ll save yourself from having to pay back all of that interest.
Even if you’ve got debt that carries a relatively low APR (such as an auto loan), pay it off! In addition to interest reduction, another great reason to pay off your debts is that it frees up cash flow from your budget. For example, if you were making car loan payments at $500 per month but then paid off the entire balance, that’s $500 more per month that you can do whatever you want with!
2-Payoff Your Mortgage
Your home is your castle. But financially, it can also be a giant ball-and-chain. That’s why, for many people, paying off your mortgage has been regarded as one of the hallmarks of financial independence.
Whether you’re a millennial or a Gen Xer, the average mortgage balance is between $224,500 and $238,344 according to BankRate. Though $100,000 isn’t going to completely erase your mortgage, it will definitely put a significant dent in your loan and save you thousands of dollars of interest in the process.
3-Invest Into Your Retirement Funds
Anytime you come into money, one of the best places to shield it from taxes is to take advantage of your tax-advantaged retirement accounts. That would mean putting the money into your 401(k) and IRA. Investing in your retirement is always a good idea.
Since the IRS puts annual contribution caps on your retirement accounts, you’ll have to be a little bit creative about how you move the money into these plans. Here’s how I would recommend doing this:
- Max out your 401(k) for the current year by increasing your contribution level for the year and then using a portion of your $100,000 to cover the difference of the money that’s now missing from your paycheck. The annual contribution limit is $19,500. If you’ve got a spouse, then max out their plan too using the same method.
- Max out your IRA for the current year using a portion of your $100,000. The annual contribution limit is $6,000. If your spouse also has a plan, then max that out too.
- For the following year (and beyond), repeat this process of maxing out you and your spouse’s 401(k) and IRA until the entire $100,000 has been filtered through.
Though that may seem like a lot of effort, believe me, it’s well worth it! If you generally pay approximately 25% of your income to taxes, then by moving your money through your retirement plans, you could be saving as much as $6,375 in taxes each year.
Plus, don’t forget: The more money you contribute to your retirement plans, the more potential your investments have to grow and compound over the years.
4-Create A Serious Emergency Fund
Another good way to invest $100,000? An emergency fund! Most financial experts recommend that your emergency fund should contain 3 to 6 months’ worth of your living expenses. If you earn $100,000 per year, that’s as much as $50,000 you should have stashed away.
For a lot of people, that’s just simply not a reality. But if you’ve got $100,000 to work with, then it’s game on! You could park a significant portion of this money into a high-interest savings account and rest knowing in complete confidence that you’d be financially prepared to take on nearly any emergency that comes up.
5-Assemble A Dividend Stock Portfolio
If you’d like to see a more immediate return on your $100,000, then what you need to start doing is investing in some dividend stocks.
With dividend stocks, the company pays you a percentage of the earnings they make every quarter just for simply being a shareholder. All you have to do is own the stock and the company will send you a check every quarter. You can truly make simple passive income from dividends!
If you invested the full $100,000 into a dividend stock portfolio with an annual yield of 4 percent, then you could expect to be paid $4,000 every year (or $1,000 per quarter).
While that might not seem like a ton of money for a $100,000 investment, keep in mind that dividend stocks have the same potential to grow over time just like any other stock. For example, let’s suppose that the overall stock price rose an average of 6 percent for the year. That means your $100,000 would now be worth $106,000, and between the dividends and capital gains, you actually net a $10,000 gain.
How To Buy Dividend Stocks
There are lots of great places where you can go to invest in stocks:
- Full-service brokers such as Vanguard and Fidelity
- Discount brokers such as E-Trade or TD Ameritrade
- Robo-advisors such as Betterment, Wealthfront, and M1 Finance
6-Buy Rental Properties
If starting a side hustle sounds like something that you’d like to get involved doing, then $100,000 could go a long way towards buying your first (or even multiple) rental properties.
Let’s say you bought a house using all of the $100,000 and took out no mortgage. Now, not only do you not owe a bank any interest or mortgage payments, but you also get to keep almost all of the money your tenants pay you (minus taxes and maintenance of course). That means you’d both own an asset containing $100,000 of equity as well as enjoy $500 to $1,000 of rental income per month.
But why stop there? You could buy two properties using $50,000 as a down payment for each one. Though you’d most likely have to take out a mortgage for each property, the payments would likely be relatively low. And you’d have two sets of tenants which means double the rental income!
REITs – The Real Estate Alternative
If you’d rather not deal with tenants or property directly, then you could always invest in a REIT (real estate investment trust). This is a special type of fund where investors pool their money to purchase groups of various real estate assets. You can easily purchase them through most brokers and robo-advisors.
7-College for Your Children
Finally, if you’ve got children under the age of 18, think about all the hassle you could save them with student loans by putting your $100,000 away for college.
In the U.S., the most tax-efficient way to save for your children’s college is to use a 529 plan. A 529 plan works similar to a Roth IRA, but instead of retirement it’s intended to pay for college. When you invest the money, you don’t pay any taxes on the earnings as long as you use them for college-related expenses.
Every state offers its own version of a 529 plan. Check online to find out how you can get started with yours.
Final Thoughts: How To Invest $100,000
Now you know some of the best ways for how to invest $100,000. There are so many investment opportunities to put your money to good use. Maybe you don’t have quite that much though, or are simply looking to invest less? If so, you may enjoy our article on how to invest $1,000.